Despite new IMF advice George Osborne is still in denial – my Guardian article

There’s nothing like a long-haul flight to give you time to think. So with his mobile phone turned off flying back from the International Monetary Fund summit in Tokyo, I hope our chancellor has taken the time to reflect.

Because this weekend’s IMF gathering has marked a significant turning point in the debate about austerity in Britain and around the world – however much our chancellor tries to pretend otherwise.

Over the past two years, George Osborne and David Cameron have increasingly seemed in deep denial, desperate to pretend things are going to plan when everyone else can see their strategy is badly off track.

Now even the IMF has concluded that deep tax rises and spending cuts will have a much more negative impact on economies than it previously thought. Or, to use the economic jargon, that the “fiscal multiplier” has been much higher in the aftermath of the global crash.

Of course, two years ago, the IMF was one of the strongest supporters of Osborne’s plan A. But it has been inching towards a new view for many months. A year ago, when forecasting growth of 1.6% in the UK in 2012, it said that if things turned out worse the government should adopt a plan B of temporary tax cuts and extra infrastructure investment.

Twelve months on, with its forecast down to minus 0.4%, Britain in a double-dip recession and borrowing on the rise to pay for the mounting costs of economic failure, there can be no question that action to kick-start the economy is urgently needed.

Will George Osborne listen? Sadly, politicians in denial usually claim that nothing has really changed. That’s why the chancellor has spent the weekend insisting he is at one with the IMF on the need for a credible deficit reduction plan. The problem is there is nothing credible about a plan that leads to a double-dip recession and rising borrowing.

The central political and economic debate remains not over whether to get the deficit down, but over the best way to do so. And with this new evidence from the IMF it is clearer than ever that action on growth and a steadier and more balanced deficit reduction plan would be more successful in getting borrowing down over the medium term and preventing long-term economic damage.

In these circumstances, the reckless thing to do is simply to press on regardless. The sensible thing would be for the chancellor to accept the IMF’s revised estimates and announce action to stimulate the economy now.

That is why I proposed using the funds raised from the imminent auction of the 4G mobile phone spectrum to build 100,000 more affordable homes, creating hundreds of thousands of jobs, alongside temporary tax cuts to kick-start growth.

Of course, politicians in denial also pretend things are better than they seem. The government will doubtless take false comfort from next week’s GDP figures. With billions of pounds of Olympics TV rights and 18 months of ticket sales all counted in this quarter, we should finally emerge from the longest double-dip recession since the second world war.

But that one-off boost, no matter how big it is, should not breed complacency. Even if growth was 1% last quarter, as some are expecting, our economy will simply be the same size as a year ago. The major question is what level of growth can be generated in future quarters and, crucially, whether we can ever catch up all the ground we have lost over the last two years.

A further denial tactic is to try to change the subject. That is why ministers at the Conservative and Liberal Democrat conferences merely wanted to talk about further cuts to be made in 2015. But the only reason for that debate is that a failing plan and no growth means the government’s promise to balance the books by the next election looks set to be broken, and by some margin.

The longer this stagnation continues, the bigger the fiscal challenges we will face. So the most vital debate now is why the government’s plan has not worked and what we need to do by 2015 to get our economy back on track.

Tragically, I fear the Treasury will simply bat away the new estimates from the IMF, and Britain will be left with a chancellor in denial, trapped by a failing plan, and dragging the country down with him. Surely Britain deserves better?

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Posted October 15th, 2012 by Ed

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